Fed’s stimulus’ not an economic elixir

For the third time since the Great Recession started, the Federal Reserve System announced that it will buy securities to lower interest rates. This is further proof that the Washington establishment hasnít been able to spur a real economic recovery.

For the third time since the Great Recession started, the Federal Reserve System announced that it will buy securities to lower interest rates. This is further proof that the Washington establishment hasnít been able to spur a real economic recovery.

Yet here we are, with 8.1 percent unemployment, and 23 million people unemployed or underemployed. When will Washington and Fed leaders get the message: The national economy needs different medicine, a combination of less federal spending and relief from uncertainty on taxes and excessive regulation.

Those policies are of course beyond the Fed ó the nationís central bank which is charged by Congress with stabilizing the monetary and financial system. What it can do is lower national interest rates. Or, as with so-called quantitative easing, it can buy mortgage-based securities and give a boost to the nationís finances by injecting cash into the economy.

The Fedís announcement was mostly well received by Wall Street, which likes the fact that the Fed is taking measures to boost the economy. But unlike previous announcements, the Dow Jones industrial average was relatively tempered in its increase.

Perhaps thatís because in taking such now familiar economic measures, the Fed risks increasing commodity prices. The United States has been down that road before in the 1970s, and it was not a pleasant journey for Americans.

But the Fed is hoping that the buying of securities filters down to consumers in the form of lower long-term interest rates. The Fed also said it would extend a plan to keep short-term rates at record lows through mid-2015, according to the New York Daily News.

This makes the cost of cash cheaper. It also makes the dollar weaker. So why would the Fed do this?

The reasons seem clear. The Fed hopes to stimulate borrowing, consumer purchases and job growth. Fed leaders hope this will increase the gross domestic product ó the overall measure of national income.

But there is always risk when economic activity is based on cheap money. The credit-rating agency Egan Jones cut the credit rating of the United States from ďAAĒ to ďAA-ď as a result of the Fedís actions. Egan Jones, which is recognized by the federal government as a credit reviewer, said the securities purchases wonít grow the economy but will likely weaken the dollar.

A weak dollar usually means higher commodities prices. That means such items as oil and corn go up in price, shrinking profit margins for businesses and weakening consumer demand. The Fedís action is fraught with such risk.

What federal leaders really need to do to stimulate the economy is to stop going deeper into debt, keep tax rates steady, lower or replace them, and reduce the regulatory burden on the private sector.

Page 2 of 2 - One thing seems all but certain: Our nationís elected leaders cannot depend on the Federal Reserve alone to bail out the nationís economy.